Buy HOMERIZ (KLSE 5160) - Homeritz Corporation Berhad

Today, I’m going to introduce you all a share that I just bought in. I bought this stock at RM0.38 last week.

Founded in 1997, Homeritz is an integrated designer, manufacturer and exporter of a complete range of upholstered home furniture, comprising leather and fabric-based sofas, dining chairs and bed frames. They had created their own brand name “ERITZ” in 2008. The company has plants at Muar, and expanded to Vietnam last year.

Homeritz built a diverse customers base spanning across more than 55 countries, including Europe, Australia, New Zealand, North and South America, South Africa and the Middle East. Largest market is Europe which contributes to 54.5% of total revenue followed by Australasia region which contribute to 25.4% of sales, while North/South America contribute to 13% of revenue. The company listed in KLSE main board Feb 2010.

After quick glance at the company profile, let me tell you why I bought HOMERITZ share. Firstly, when I look at the low PE (Price/EPS), with the EPS (Earning Per Share) of RM0.089 year 2010, the PE is only 4.3 (RM0.38/0.089)! Which mean that the company just need 4.3 years to earn back the money I invest now. sounds great for me!

Let’s look at the ROE (Return of Equity) then, the ROE is 35% ended Aug 31^st 2010, which is the highest in the same industry.

Compound Annual Growth Rate (CAGR) is around 22% for the past five years. For year 2010, the revenue only increase from RM108.4m to RM110m, which merely contribute to ~1.5 growth rate.

You might start to start worry about it after you see this slow growth rate. Is it meaning that the company had stop growing and the market is saturate? The answer is NO! The drop of revenue mainly contributes to the weakening USD, which drop ~10% last year. With the sales of products in USD, meaning that we should the growth rate of revenue last year should be at least 11%. The other factor contributed to the lower sales from Europe die to the economy downturn there. However with the strong growing sales (up from 7.8% to 13%) from America, I would think the revenue will continue to grow next year. I don’t think that USD is going to continue weakening and it should be the worst case now. So I would forecast that the company will have a CAGR of >20% in the coming years. Same to go the net income, net income dropped from RM20m year 2009 to 17.6m year 2010, but as I said, this is temporary and we shall continue to see the grow.

One thing that I think having pro & con, is the company main share holders is a couple (founder of HOMERITZ - Chua & Tee) which hold 71.8% of company stock. Pro is that the couple believe that company will continue to make money, con is that this stock having low liquidity. With 17m cash on hand, the couple stated during the IPO launching that the main purpose of the IPO is not for expanding, is to build an international reputation together with their brand “ERITZ”!

For the dividend, HOMERITZ distributed RM0.051 as dividend, with the price I bought RM0.38. It will be ~13.4% return. Well this is higher than FD which is only ~2.7%. Homeritz having policy of distributing 40% net profit as dividend. So with estimated RM20m net earnings, the dividend will be ~RM0.04. How I calculate it, with the total shares of 20m, dividend = (RM20m*40%)/20m. This haven’t factor in the growth rate of the company. So with buying price of RM0.38, I will be waiting for a >10% return with the dividend itself.

The total net asset of the company is ~RM63m, which is a bit lower than the market capital ~RM79m with share price of RM0.38. However with the high earning power of the company, this factor should be negligible.

HOMERITZ is almost debf free, with short debt of RM0.6m & long term debt of RM5.5m, the company will be able to survive during economy downturn with cash on hand of RM17m.

With all the above factors, I strongly suggest to buy in HOMERITZ and keep it for long term investment! Without the history cash flow information as is a new company, I won’t be able to calculate the intrinsic value. So i’m going to forecast it using the PE. With the average PE for the industry at 23, I will set the target price to be at least 10 for now, which mean the target price (TP) is ~RM0.80. However, HOMERITZ is a new company, thus I will be continue monitoring, and providing update.